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Zimbabwe’s Economic Reform Challenges

Ten months ago, on August 26, 2015, Zimbabwe’s 92-year old leader, Robert Mugabe announced a 10-point plan to revitalize economic growth. Since then, the government has taken steps that signal the intention to transform a moribund economy. But the question is whether a Mugabe-led government can be successful in restoring growth and confidence in a once-promising economy that has been severely mismanaged for the better part of two decades.

An economic reform initiative in Zimbabwe has been long overdue. GDP growth has dropped well below 2 percent, and the economy is half the size it was 15 years ago. The country is experiencing its most severe drought in 20 years due to El-Niño conditions and nearly three million people are at risk of starvation. Poverty is expected to rise in 2016, and the poor, especially in the rural areas, will be most impacted.

Certain aspects of the reform initiative represent significant departures from past policies and deserve careful review. The bigger challenge is whether the program can succeed given the government’s poor track record on human rights, respect for the rule of law, and the intensifying competition to fill Zimbabwe’s growing leadership vacuum, given Mugabe’s advanced age.

Moreover, the recent announcement by Reserve Bank Governor John Mangudya that he will introduce local “bond notes” has raised fears that the cash-strapped economy will return to the chaos and hyper-inflation that crippled the economy prior to the move to the dollar in 2009. Even though local coins have already been introduced into the economy, and Mangudya has a $200 million loan from the Africa Export-Import Bank to support the notes, his plan for a local currency has deepened the country’s economic anxiety, especially among Zimbabwean businesses and professionals.

The reforms

There is no question that Zimbabwe is taking strides to reform its economy.

At the annual IMF/World Bank meetings in Lima, Peru last October. Zimbabwe’s finance minister, Patrick Chinamasa, and Mangyuda presented a plan to settle the country’s $1.8 billion debt to the international financial institutions (IFIs). Zimbabwe has been in default for 15 years to the IFIs and is the only nation in the world in arrears to the World Bank’s non-concessional lending window, the IBRD. The government recently completed successfully an IMF Staff Monitored program that has paved the way for this effort by building a favorable track record.

The repayment plan is predicated on a loan of nearly $1 billion from Algeria, to be repaid over 10 years, and bridge financing of $400 million from the Africa Export-Import Bank that will be used to settle the country’s obligation to the African Development Bank. Given low oil prices, however, it is unclear when the loan will become available although Algerian authorities have indicated they intend to provide the resources.

An element of flexibility has also been introduced into the government’s indigenization policy, Mugabe’s signature program that requires foreign investors to give majority control of their investments to locals. Line ministers, such as in agriculture and industry, are now able to negotiate indigenization plans with investors. While 51 percent equity will have to be handed over by foreign companies who invest in natural resources, “empowerment credits” can be negotiated to achieve the 51 percent threshold in other sectors.

Even in its revised form, though, Zimbabwe’s indigenization policy is the most onerous set of local content requirements of any country in Africa and remains a significant deterrent to attracting new investment.

Another reform proposed by the Zimbabwe government is a program now being advertised by the Ministry of Lands and Rural Resettlement that would enable farmers to lease land for 99 years. A fully functioning long-term lease program, including transferable title, would enable farmers to use their leases as collateral with commercial banks to secure loans. As important, 99-year leases would help restore the rule of law to a sector defined by violence, illegal seizures, and cronyism. Commercial banks, however, do not yet have sufficient confidence in the structure of the program or that land seizures have stopped completely and the banks have not begun to accept the leases as collateral for commercial loans to farmers.

Compensating white farmers

Perhaps the most unexpected reform was the March announcement made by Finance Minister Chinamasa that the government of Zimbabwe would pay “fair compensation” to the estimated 4800 white farmers forced off their land. Few issues have been as central to Zimbabwe’s isolation in the global community as the forced evictions and land seizures that began in 2000 and destroyed the country’s most productive economic sector. Sustained progress in restitution would be an important indicator of the government’s commitment to a new era of respect for the rule of law.

The government expects to finance the compensation program, which according to some estimates would cost more than $10 billion, through the imposition of a land tax, treasury bills, and donor support. The government has since announced that it has begun to repay former white commercial farmers who lost land and has undertaken a countrywide effort to evaluate the seized farms in order to pay the former landholders for the improvements they made.

However, the land compensation program has been described as an “illusion of reform,” by former Finance Minister Tendai Biti’s People’s Democratic Party (PDP). Indeed, under present circumstances, it is hard to envision Zimbabwe replicating Uganda’s experience where authorities have returned an estimated 3,493 of the more than 8,170 properties confiscated from the Asian community by Idi Amin in the early 1970s.

The U.S. and Zimbabwe

The United States would be prudent, nevertheless, to encourage Zimbabwe’s efforts to revitalize its economy. Specifically, the U.S. should engage the country’s private sector that largely supports the reform program. For example, the President’s Advisory Committee on Doing Business in Africa could conduct a fact-finding visit to the country and representatives from Zimbabwe’s private sector could be invited to participate in the second U.S.-Africa Business Forum in September in New York.

The U.S. should also coordinate its policy with the European Union, which lifted its sanctions and asset freeze in 2014, except for a travel ban on President Mugabe and his wife, Grace. After 13 years, U.S. sanctions on Zimbabwe have outlived their usefulness. Washington claims that the program is “targeted” on 98 individuals and 68 entities, but the broader perception in the international business community is that the U.S. has sanctions on all of Zimbabwe. Moreover, reform critics, such as Grace Mugabe and her supporters, point to U.S. sanctions to rally support for herself and her husband.

A pragmatic U.S. approach would contribute to progress on the reforms and Zimbabwe’s reengagement with the international community and the IFIs. However, a revised U.S. approach to the country should be predicated on achievement of specific economic reform targets, respect for human rights, and the rule of law and, ultimately, free and fair elections in 2018.

This article originally appeared in The Brookings Institution’s “Africa in Focus” blog.